We were recently asked a series of questions by Joanna Glasner of Crunchbase and it provoked some thoughts about millennials, diversity, and the future of housing.

Introduction

Investing in "Real Estate Tech" certainly picked up in the last year, CB Insights reports that more than $2.5B going into RE tech investments in 2016 alone with predictions to increase.

That said, we actually think of the space as even broader than that. We particularly focus on companies that can span multiple markets of which one is real estate so, "real estate tech" in our mind encompasses a lot more then a new property management platform. For example, TaskEasy, UrbanBound, HelloTech, and Contactually are all examples of companies that you would never call “RE Tech” yet have significant influence, and command significant $$s from the real estate space.

When you start to broaden the market to look at the industry as 1.5M independent contractors, 600,000 SMBs and thousands of enterprise clients, you start to realize that ‘tech’ generally can fit into a ‘RE Tech’ strategy and the opportunity is vast for technologies outside the industry to enable change within it.

Are you seeing an increasing level of investor and/or entrepreneur enthusiasm around real estate recently? If so, what are the drivers?Yes, there have always been investors dabbling in the space but the interest has seemed to increase in the past couple years. Main driver: a $3T+ market! I'm surprised it took people this long to catch on.

Real estate and its adjacent industries are broadly behind in technology adoption so many investors look at the space as low hanging fruit. As someone who has been investing in the space for 10+ years, I can say that most investors do not understand many of the nuances in the space such as: what drives adoption, true market sizing, political under-hangings and other factors that are not innate to those that are not engrained in the industry. This is why we exist! We have an entire program (the Moderne Passport) dedicated to helping our companies figure out quickly what others bang their heads against the wall for years trying to figure out.

How do you see the maturing millennial generation changing the real estate business, particularly as consumers, as they increasingly enter the rental and homebuyer markets?It has been an interesting time where most markets have seen some of the highest affordability rates yet lowest numbers of new homeownership rates in history. Most of this is due to the last recession: lending got so tight it was impossible to get loans unless you were the perfect middle aged consumer that checked the appropriate 500 or so boxes; Millennials were taking longer to find ‘real’ jobs out of college and more recently, pent-up demand for rental units have birthed amazing rental communities that have driven demand away from homeownership in favor of lifestyle and freedom as more favorable value choices for this particular population. These factors coupled with urban renewal, community and an acceptance of the ‘shared economy’ at large (people not used to owning anything) have influenced the trend of low homeownership for millennials.

All that said, there will be an interesting buy-vs-rent tension to watch in the next few years:

Tension to Buy

Millennials now have jobs, incomes and characteristics such that they too can check the 500+ boxes necessary to get a loan

Millennials are now starting to have kids. Until inner city schools get fixed, suburbs will be an attractive option for those that cannot afford private schools

Undersupply in certain markets will drive prices higher and into more demand for h ome ownership

Tension to Rent

Multifamily owners and operators are increasingly creating digital, service-based amenities (Hello Alfred, Baroo, HelloTech to name a few) to give their renters back a commodity we have never needed more: time. Time to accommodate other challenges millennials face as they ‘grow up’

Lifestyle, sustainability, and community are key values of this generation and may drive market fo rces to fix some of inner-city challenges for family living

Other Trends to Watch

This decade will see more diversity (race, gender and heritage) in homeownership than ever before. Boomers will stick it out longer and move urban. As Boomers age, technology in home healthcare will keep them in their homes longer and senior “lifestyle” communities, unlike those grandma ever knew, will attract others away.

What areas of the real estate industry do you see as particularly ripe for startup disruption?

Three big areas of note:

Applications of blockchain technologies that drive down friction and transactional costs will create big wins.

There are massive information barriers across all aspects of residential and, particularly in commercial real estate – there is a big opportunity to fix this!

Smart homes and smart buildings will become expected norms and they will all be controlled from a mobile device.

Moderne Ventures recently invested in the Series A round of Hello Alfred – a logistics focused company that combines smart tech and excellent service so property managers may offer multiple on-demand amenities to tenants in their Class A properties.

Hello Alfred for Multifamily Building Tenants

Just like Bruce Wayne’s trusted butler, an ‘Alfred’ is a dedicated home-life manager who proactively takes care of time consuming tasks such as grocery shopping, laundry/dry cleaning duties, packaging, and shipping. Tenants in an ‘Alfred Building’ typically receive this basic weekly services package, however, they may also coordinate with their Alfred for additional services such as deep in-home cleaning, gift shopping, washing your Batmobile, or whatever inconvenient tasks that need to be done (at market rate), all directly through the Hello Alfred app. They appreciate the efficiencies and experience that their Alfred delivers; helping to manage “life’s administrata” allows them to spend more time on the things they love. To date, Hello Alfred has made more than 700,000 home visits, saving tenants more than 380,000 hours of time.

Hello Alfred for Multifamily Building Property Managers

Hello Alfred’s tech enabled services have a clear impact on buildings and their property managers by:

Increasing revenue

Reducing lease-up time

Lowering resident churn

Reducing operational overhead

Hello Alfred and Moderne Ventures

Something that drew the MV team to Alfred is their ability to establish personal trust with tenants in an on-demand economy where the same provider is rarely used to deliver the same service. The result is that tenants trust their Alfred (a lot). Putting a face, name, and personality in a home, a place where a very limited number of people have access too is critical to the company’s success and the happiness of tenants, who see Alfred as a differentiator and factor in whether to renew a lease or live in an Alfred building.

We also see Alfred taking advantage of several macro trends that align with the company’s longer-term success by positioning for win-wins on several fronts:

Multifamily construction deliveries will continue at a record pace into early 2018. Most expect supply to outstrip demand, which will place further emphasis on a building’s ability to differentiate itself. In order to compete for the growing number of consumers that value the superior amenities and the flexibility that renting brings.

Increasing (or maintaining) rental rates with an amenity that doesn’t take up space has a positive impact on NOI.

The ‘Amenity War’ is shifting tactically from traditional brick-and-mortar offerings, like the pool or a gym, to technology-based enablement.

Digital natives (tenants) expect to engage with their buildings and living spaces in a customized and seamless manner

We’re excited to be a part of the Alfred story, helping to change the way people live with a service that gives them back something we all need more of: time.

Moderne Ventures attended the National Apartment Association in Atlanta, GA the week of June 19th with 5 of our new Moderne Passport Class companies. An afternoon full of mentor meetings with executives from the likes of Greystar, Cortland Partners, Kayne Anderson Capital Advisors, Real Property Management, and Federal Capital Partners, fostered new relationships, and filled all parties with knowledge and insight.

On Friday afternoon, the CEO's/Founders of abode, Baroo, CubiCasa, Hello Alfred and HelloTech all presented to an engaged crowd on how they're delivering innovation to the multifamily space. Whether through amenity driven services or improving data quality, the companies and the crowd were exposed to new ideas that stand to help each other differentiate themselves across their respective marketplaces.

The Shifting Value of Real Estate Agency. Part I.

Initial article in an op/ed series about technology and other factors that are disrupting the traditional value of residential real estate agency.

As a VC at a fund that invests in technology companies building products and services applicable to the real estate industry, I’m often asked about my thoughts on the future of residential real estate agents. It’s a somewhat polarizing question – those in the industry are convinced the agent will always be a crucial player in a transaction, and many argue the opposite. It’s not a simple answer, but to provide some perspective, I think it’s important to review the current role of the agent in the process, to discuss the capacity of technology to replace the agent, and apply some business theories to inform us on what the future may hold for the profession.

What is the agent’s current role in the process?

When a buyer or seller signs a real estate agent to represent them, they typically sign a contract that, for a certain percentage of the sale price, historically ~3% per side, indicates they will prepare and negotiate offers, market/show a property to a buyer, facilitate the purchase/sale and closing process, provide local market expertise, monitor the MLS, etc. In short, they quarterback the transaction process.

Those that wonder why a real estate agent is still prevalent in the process often ask: can’t technology do all of these things? Why do we pay top dollar to hire real estate agents when technology can do all of that for a fraction of the price? There are plenty of ways to price and locate properties, coordinate the parties involved in a transaction, and perform almost all of the tasks agents are contractually obligated to do. These are rational questions, but if a real estate agent is really hired to do something that technology currently has the capacity to replace, why do 92% of buyers use the internet during their search but still use an agent 88% (!) of the time? Why does the number of Realtors in the US look like this?

Maybe there’s more to it.

Clayton Christensen, a well-known business strategist and father of “disruptive innovation”, developed a theory that I believe can help explain this phenomenon. Christensen’s Jobs-to-be-done theory states that a “job” is essentially shorthand for what someone wants to accomplish in a given circumstance. We “hire” products and services to get whatever “job” we need done. As argued in a recent Harvard Business Review article, “the circumstances are more important than customer characteristics, product attributes, new technologies, or trends” as it relates to hiring the right product or service to get a job done. In my opinion, this is a critical element in explaining the job that a real estate agent is hired to do.

For many, a real estate purchase or sale is one of the largest – if not the largest – transaction a person will make in their life. They can’t afford to mess it up. Selling at a price that’s too low or buying at a price that’s too high can have a material impact on their financial livelihood. Making a legal misstep in the process carries the same potential for a financial nightmare. In my opinion, this is the largest driver for why people hire a real estate agent: they don’t want to mess it up.

Almost as important, consumers don’t want to feel like they messed it up. Hiring an agent largely feeds a confirmation bias and agents do a good job at providing peace of mind. Peace of mind and feeling good about what you did are very human elements, and providing those elements are jobs that technology has a very difficult time replacing. This is great news for real estate agents. What’s even better news is that it is nearly impossible for the buyer or seller that hired the agent to know whether they bought or sold at the best price. Properties are different, buyers and sellers are different, financing situations are different, etc. Ask an agent why their profession is still around and they’ll constantly tell you: “This is a people business!”, which describes the real job that they’re hired to do.

For now, they might be right, but as the customer changes, they could be in for a shakeup.

What does this imply about the future?

Just because a real estate agent is hired to do a job that technology has a difficult time replacing does not mean all is well for real estate agents. Agents are hired to perform a lot of jobs that can, and are, being replaced by technology. The ‘real estate tech’ space has attracted billions of investment dollars2 and produced companies that are building products that perform many jobs an agent is traditionally hired to do. From a buyer or seller’s standpoint, this implies that you’re likely paying the same ~3% per side – which hasn’t changed in decades - for an agent to do fewer ‘jobs’, as technology is ‘hired’ to do the rest. The problem is that this can actually feel good to a real estate agent: if they can leverage technology to do more of their job, they’ll be paid handsomely for fewer hours of work, freeing up time to devote to cultivating new relationships and buying/selling more homes. Then what happens? At some point, the tables turn. Technology will perform the majority of functions and drive the buyer or seller process, and an agent will support the technology by providing the support and ‘people’ side of the business. If (when) this happens, a likely consequence will be increased price pressure on an agent’s commissions, as a buyer or seller realizes that an agent is performing fewer of the jobs that they were previously paying the same amount for (the buyer agent in particular - but we’ll touch on that in later posts).

Can technology really replace the agent? What can agents do?

In my opinion, there will always be a role for a real estate agent for certain segments of the market. Some people don’t trust technology (and may never), some don’t want to have to deal with the technology solutions, some don’t want to spend much time at any stage of the process, some want the ‘white glove service’. However, the size of those segments will ultimately determine the outcome of the future of real estate agents. If millennials – the largest segment in the next wave of home buyers and sellers – do, in fact, trust technology and accept the perceived risk involved in leveraging technology to buy and sell their largest asset, far fewer agents may be needed.

In the near term, real estate agents can leverage technology to make their current jobs more efficient and productive and enable them to close more deals every year. The advent of the ‘team’ structure is a sign that this is already beginning, as teams leverage comparative advantages of agents to be more efficient.

In the longer run, I believe that the long tail of agents that represent a few sides a year will go away. It’s no secret in the industry that the barrier to becoming an agent is very low and that the average agent only does a few sides a year. With increased price pressure it likely won’t be worth it for them anymore. In this scenario, the agents who do stick around will be those focusing more narrowly on negotiations and providing personalized support to buyers and sellers. If this plays out as I expect, these agents should ultimately be capable of representing more sides each year (as each side will require fewer hours of work) at lower margins.

Conclusion:

Technology is going to change the role of the real estate agent, but it doesn’t mean the end of the profession. Ultimately, the future of agents will be determined by the market’s trust in technology and acceptance of risk to drive the largest transaction in most people's’ lives. In the interim, agents should leverage technology to help them do their job better, and continually focus on providing the personalized support and guidance that technology has a difficult time competing with.